Subsidies for Reshoring: Evidence from Taiwan

This paper empirically investigates the causal effect of subsidies on reshoring in Taiwan. The Taiwanese government has provided subsidies to Taiwanese firms to encourage them to relocate their factories from China back to Taiwan. Using the matched data between firm-level business information and the list of subsidy recipients from 2016 to 2022, we investigate how subsidy recipients change their behavior in both China and Taiwan. To mitigate the bias introduced by the selection mechanism in this subsidy, we employ the doubly robust difference-in-differences method. As a result, we found that this subsidy program was effective, in the sense that it generated more investment in Taiwan than its total subsidy amount, according to our cost-benefit analysis. More specifically, the subsidy recipients began to increase their production in Taiwan, with their production in China remaining unchanged. They also increased their exports from Taiwan rather than their domestic sales. Thus, firms may have switched their export base from China to Taiwan, perhaps to avoid US additional tariffs against China. In this sense, the subsidy program succeeded in inducing Taiwanese firms to reshore their operations.